Of late, there has been a buzz on whether Indian entrepreneurs, with their attracting of unprecedented levels of investments, have finally arrived on the big stage.

According to a study by Venture Intelligence, private equity investments in India were up 24 per cent to over $10 billion in 2011. Also, investments in start-ups and early-stage ventures went up from a mere $300 million in 2010 to $1.2 billion last year. These seem to indicate that the country's entrepreneurship ecosystem is perhaps entering the stage of vibrancy and that the much-needed risk capital ecosystem has finally emerged.

However, one must bear cautious optimism as this is just one side of the story. When one considers the availability of risk capital and the adequacy of exit options for the investors at each of the entrepreneurial stages - from prospecting, ideating, conceptualising, prototyping, piloting, commercialising, and early growth to sustaining the growth - it appears that the financial ecosystem of the country has still a long way to go.

Looking at the current start-up trends, mostly skewed towards e-commerce space, one also wonders whether the interests of late stage investments could well be sustained in the near future.

Today's constraints

For potentially high-impact enterprises, access to capital at the early stages is critical. Institutional support in the form of government programmes and policies, and private funding from angel investors, play a crucial role in this phase of translating research into innovations and demonstrating the commercial potential thereof.

Given the high venture failure rates, more high risk investments are needed in this phase when entrepreneurs are looking to build proof of concepts and run pilots. But angel ecosystem in India is still in nascent stages, accounting for only a couple dozen deals each year. Barely any angel network has reach beyond a few metros.

Perhaps an equally critical financial constraint is that faced by micro, small and medium enterprises (MSMEs) with survival and growth aspirations. Over the years, there has been a significant increase in credit extended to this sector by the banks. As compared to the year before, the FY2011 registered an increase of 32 per cent in the total outstanding credit provided to the MSME sector.

But the fact that MSME financing gap, as a study by IFC-Intellecap points out, was estimated at $144 billion for the FY2010, spells the extent of financing gap. Financial exclusion in the sector is also high. According to the fourth Census of MSME sector, only about 5 per cent of the registered and unregistered units had availed of finance through formal institutional sources, while the rest resorted to non-institutional sources, self-financed or had no access to finance.

The traditional view has been that these issues of entrepreneurial financial are hard nuts best left to be cracked by financial institutions and industry. But government and academia in countries elsewhere have demonstrated distinctive facilitative roles that they could play in addressing these market failures.

Role of academia

On nurturing entrepreneurship, financial and academic worlds in the country still work at arm's length. The potential of collaboration between these institutions in addressing the entrepreneurial financing gap is less understood. But looking at more evolved entrepreneurship ecosystems, such as that of the US, provides for unique role that academia has been playing in facilitating the access to capital. Consider, for example, the role played by MIT and Harvard Business School in the 1940s to fill the risk capital needs of translating academic research into marketable products and entrepreneurial firms. Jointly establishing American Research and Development Corporation, they are credited with legitimising the venture capital concept and institution. By demonstrating their success in the formation of new firms such as Digital Equipment Corporation, these institutions forever changed the trajectory of the investing in ventures.

Role of government

Governments across the world have explored various approaches – such as grants, subsidies, tax credits and investments - to support financing of enterprise creation and growth. But only a few governments have catalysed large changes in shorter course of time. For example, the Israeli government's $100-million venture capital fund that was designed in the 1990s. By 2000, the venture capital available in Israel was $3 billion, as compared to mere $100 million in 1990s. Today this nation, just 60 years old, attracts more VC dollars per person than any other country – 2.5 times the US and 30 times Europe.

In fact, this country has more technology start-ups listed on Nasdaq than all of all of Europe, Japan, Korea, India and China combined. In short, the Israeli government's pivotal role in facilitating flow of venture capital has supercharged the nation entrepreneurially.

In conclusion

Just as academic institutions, especially of higher echelons in India, have much to learn from the exemplary institutions such as MIT, so could the Indian policymakers learn from other entrepreneurial nations such as Israel, in facilitating conducive access to entrepreneurial finance. But at the risk of repetition, it must be emphasised that it is not in emulating these successful models, but in distilling the insights and thereafter building a context-specific solution that a similar impact can be set-off in India.

(The author is Executive Director, Wadhwani Centre for Entrepreneurship Development, Indian School of Business, Hyderabad.

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